If you need to borrow money you will naturally want to find the cheapest deal. Many people want to find a free loan that will allow them to borrow a lump sum without having to pay any interest. In this article we look at the different options for interest-free and low-cost finance, considering the key features to help you decide which one might be the best for your circumstances.
Can I get an interest-free personal loan?
The short answer to the question of whether it is possible to get an interest-free personal loan is: no, it isn't possible. A truly interest-free personal loan doesn't exist. The interest is included within the calculation for the monthly repayment for both personal loans and secured loans.
While you won't be able to take out an interest-free personal or secured loan, they are still relatively low-cost ways to borrow money. Interest rates in general are now at historically low levels, which means the cost of borrowing is also below average. This means you could take out an unsecured loan of £10,000 over three years starting from just under 3% APR. Similar rates are available for secured loans, although they typically allow people to borrow larger amounts over a longer period. The rate you are offered and, indeed, whether you will be accepted for a loan in the first place, will be dependent on your credit history and ability to pay back the debt.
For more information on personal and secured loans, read our article "Which is the best type of loan for you?"
Can I borrow money interest-free on a credit card?
In general, if you pay off the balance on your credit card in full each month, the spending on it is interest-free. If, however, you want to use your card to make a bigger purchase on an expensive big-ticket item, you will need to find a deal with an attractive interest-free introductory offer. This means you can, in effect, "borrow" money in the same way as you would with a loan, making regular repayments but not having to make any interest payments until the introductory period comes to an end.
There are very generous interest-free offers available, with some allowing you to make purchases or transfer money without having to pay interest for several months - or even years. However, using a credit card like this requires discipline as it is easy to begin to use the card for additional spending, accruing a larger debt that is more difficult to pay off. If you fail to pay off the entire balance by the end of the interest-free period, you will then be liable to pay the card's set interest rate, which tend to start from 19% APR, but can be over 40% APR on some cards.
You also need to keep in mind that, if you are late making a payment - or miss a payment altogether - you can immediately lose the introductory privilege and be liable to pay interest straight away. It is of paramount importance to properly assess how affordable the repayments are and whether you are likely to be eligible for the card before applying. Get either of these factors wrong and it can damage your credit file.
There are two main ways you can use credit cards to “borrow” money: 0% purchase cards and money-transfer cards.
0% purchase credit cards
A purchase credit card works by giving you a set period in which you can make purchases on the card without being charged any interest. Over that time, you still need to make monthly repayments although, as long as you make the minimum repayment required by the card provider, there is flexibility over the amount you choose to pay.
The most competitive deals give you an interest-free period of up to 20 months, after which point you will have to pay interest at what will be a higher level than you would with, say, a personal loan. It is imperative, therefore, that you keep spending on the card to a minimum and work out exactly how much you need to pay off each month in order to have cleared the debt in full by the end of the interest-free period. While these cards can work well to fund a pre-planned, one-off purchase they can be potentially dangerous if the card holder falls into the trap of using it to fund day-to-day spending without properly considering how likely they are to be able to pay it all off.
Advantages of a 0% purchase credit card
- Any purchase over £100 and under £30,000 made on a credit card is protected by section 75 of the Consumer Credit Act. Full details of the cover this provides can be found in our article "Section 75 of the Consumer Credit Act explained - your rights and how to claim".
- This type of card gives you flexibility on how you use the credit facility and the way in which you choose to pay it back.
- The money you spend is completely interest-free if you pay it all back within the allocated interest-free period.
Disadvantages of a 0% purchase credit card
- You run the risk of accumulating unnecessary debt if you don’t use the card prudently.
- You can lose the interest-free introductory period if you are late making a payment or miss a payment.
- You are limited to a relatively small loan amount, which will be dependent on the credit limit offered to you by the card issuer.
For details of the current best deals on 0% purchase credit cards, read our article "Compare the best 0% purchase credit cards"
0% money transfer credit cards
A money transfer credit card works by allowing you to transfer money from your credit card to your bank account. You then have access to this money to fund purchases or to pay down other debt. By taking out a money transfer card with a good introductory period, you can enjoy many months of interest free payments before reverting to the card's standard APR.
Key points to keep in mind with a money transfer card include the fact that you typically have to transfer the money from the card to your account within a certain amount of time after taking out the card. This is generally between 30-90 days. The interest-free period starts from the moment you are accepted for the card, so you need to factor that in when working out how much you need to contribute to the monthly repayments. In addition, while it is interest-free, you will have to pay a transfer fee, which can be anything up to 5% of the total, which means it isn't cost-free borrowing. There is also the same need to pay off the balance before the end of the introductory period ends as with purchase credit cards.
Advantages of 0% money transfer credit cards
- The best deals at the moment offer an interest-free period of up to 18 months.
- As with purchase credit cards, you are given section 75 protection
- Money transfer cards often have other offers and rewards, including balance transfer and purchase deals
Disadvantages of 0% money transfer credit cards
- The transfer fee means that, while it is low cost borrowing, it isn't free
- If you carry over a balance after the introductory period, you will be moved on to a higher interest rate than you would face with other forms of borrowing
- As with other types of credit, you need to be wary of how you use it and carefully consider whether you can comfortably service the debt
For a full guide to money transfer cards - and the best current deals - check out "A complete guide to the best money transfer credit cards".
Can I get an interest-free overdraft?
Changes brought about by the Financial Conduct Authority (FCA) in April 2020 saw charges for arranged overdrafts overhauled, with many banks stopping their interest-free overdraft facilities. The standard interest for an overdraft is now around 40%, which is clearly a very expensive way to borrow money and, therefore, isn't recommended.
If, however, you would still like to have access to an interest-free overdraft, there are a number of banks still offering them, although the amount you can go into the red before being charged is small.
|Bank account||Free overdraft limit||Duration of free overdraft||Charge over free limit||Extra information|
|first direct - 1st Account||£250||Unlimited||39.90%||
£100 bonus for joining first direct and £100 if you leave because you are unhappy with the service
|TSB Spend and Save Plus||£100||Unlimited||39.90%||
£3 per month account fee, £5 cashback if you make 30 payments on your card in a month
|Club Lloyds Account||£50||Unlimited||29.90%||
£3 per month fee if paying in less than £1,500, perks including cinema tickets and magazine subsciptions
|Nationwide FlexDirect||£1,200||12 months||39.9% (after 12 month period)||
No monthly fee and 2% interest on balances up to £1,500 in first 12 months
|Santander Everyday Current Account||£1,200||4 months||39.94%||No monthly fee|
|Santander 1/2/3 Current Account||£1,200||4 months||39.94%||
£4 per month account fee and minimum £500 paid in each month
Overall, while there are free overdrafts available, they don't represent a good way to borrow money. If you are constantly in your overdraft it could be a sign you are living beyond your means. Rather than using it as a free way to borrow money, it's a better idea to focus on trying to pay off any existing overdraft you have already accumulated, particularly as it looks likely that the free deals will be phased out in the future.
Can I use buy-now, pay-later as an interest-free loan?
The popularity of buy-now, pay-later providers such as Klarna, ClearPay, Laybuy and PayPal has skyrocketed in recent years. Figures show 5 million people in the UK used buy-now, pay-later in the UK in 2020, with sales totalling £2.7bn. However, the sector has faced criticism that it encourages irresponsible spending and can lead to people getting into problems with debt, a charge the providers themselves deny. They now face greater scrutiny, with regulation set to be imposed in the near future.
Buy-now, pay-later works by allowing you to buy an item - or several items - and pay it off in the future, either all in one go or in instalments. It is attractive because the buyer doesn't have to pay interest, there are no fees and it only requires a soft credit search. The credit limit is determined by the provider on a case-by-case basis, with users typically given a low initial spending limit which then increases when they prove they can make payments on time.
Although there aren't any upfront costs for these services, all of the providers, with the exception of Klarna, charge a late fee of up to £12 per missed payment. As the purchases tend to be relatively low value, this can represent a disproportionately high cost. In addition, if you persistently miss payments and fail to come to an agreement with the provider, there is a high chance your case will be passed on to a debt collection agency, attracting high costs and causing severe damage to your credit file.
- It does offer an interest-free, short-term loan, albeit for a relatively small amount
- It can be a useful tool when buying several items to compare as you don't have to pay for the items you return, only the ones you keep.
- Using buy-now, pay-later won't affect your credit score, unless you don't pay it back for an extended period of time.
- The late fees are expensive, relative to the price of the items.
- By using buy-now, pay-later you sacrifice the section 75 protection you would have with a credit card.
- It is only a short-term loan and for a small amount.
For a full review of buy-now, pay-later read our article "Everything you need to know about buy-now, pay-later".
Can I get interest-free financing on a car, furniture or new kitchen or bathroom?
There are often attention-grabbing advertising campaigns for interest-free finance on large-scale purchases, such as new cars or sofas. They often offer a delay of up to a year before the customer has to make any payment and then a further interest-free period, after which time the entire loan will have been paid off. It can be an appealing option for customers who couldn't easily afford to make the full payment upfront, or who would rather keep their savings intact and earning interest elsewhere.
While it can be a good option, it is worth bearing in mind that the cost of the finance is usually already built into the price of the item you are buying. The high mark-up price on a mass-produced sofa, for example, means a good level of profit is guaranteed, even if the total is paid over a longer period of time. Similarly, a new car has a headline price that accommodates the cost of finance. Indeed, by taking out the finance deal, you could limit the potential to negotiate a lower price or to have additional extras included in the standard price.
With fitted kitchen and bathroom companies the finance deals may also limit the amount of discount you can secure. Moreover, you may be incentivised to go for a more expensive option if you don't have to pay the full amount upfront or pay a premium for an installation service. Similarly, you may be encouraged to buy appliances at an elevated price rather than shopping around and getting a better price elsewhere.
- It can enable you to make bigger and more expensive purchases than you could afford if you had to pay the entire amount upfront.
- It allows you to continue to earn interest on money you have in savings
- If your financial situation changes, you will still be tied to having to pay off the loan
- As with other forms of finance, you won't get the section 75 protection afforded by a credit card
- You will face penalties if you are late making payments
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